This shareholder letter is part of the Bretton Fund 2017 Semiannual Report (pdf).

August 22, 2017

Dear Fellow Shareholders:

The Bretton Fund’s net asset value per share (NAV) as of June 30, 2017, was $26.40, and the performance for the second quarter was -2.00%.

Total Returns as of June 30, 2017

2nd QuarterFirst Half 20171 Year (A)Annualized 3 Years (A)Annualized 5 Years (A)Annualized Since Inception (A)
Bretton Fund-2.00%1.07%11.31%4.82%8.24%10.17%
S&P 500 Index (B)3.09%9.34%17.90%9.61%14.63%14.20%

(A) 1 Year, 3 Years, 5 Years and Since Inception returns include change in share prices and, in each case, include reinvestment of any dividends and capital gain distributions. The inception date of the Bretton Fund was September 30, 2010.

(B) The S&P 500® Index is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the US stock market, as determined by Standard & Poor’s, and captures approximately 80% coverage of available market capitalization.

Performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. You may obtain performance data current to the most recent month-end here or by calling 800.231.2901.

All returns include change in share prices, reinvestment of any dividends, and capital gains distributions. Indices shown are broad-based, unmanaged indices commonly used to measure performance of US stocks. These indices do not incur expenses and are not available for investment. The fund’s expense ratio is 1.50%.The fund’s principal underwriter is Rafferty Capital Markets, LLC.

Contributors to Performance

HD Supply, a distributor of maintenance supplies for facilities like apartment buildings and hotels, made operational mistakes the past few quarters that have hurt revenue and margins in its largest division. The company mismanaged its inventory purchases ahead of the key selling season, partly due to losing some employees when it moved its operational headquarter from San Diego to Atlanta, and the resulting shortages and overstocks required expedited shipping and overtime costs. While we’re not crazy about the missteps, we don’t think they’re indicative of the company’s ability to grow and distribute capital over the long term. The decline in its stock price had a -1.2% impact on the fund.

AutoZone reported a lighter-than-expected quarter, mostly due to a mild winter, resulting in a -1.1% hit to the fund. Most of us consider a “bad” winter to be lots of snow, rain, and cold temperatures, but for AutoZone a bad winter is one with relatively warm weather and light snow, as car parts don’t fail at the same rate and thus people buy fewer replacement parts. Yet mild winters simply kick the purchase into future winters; it doesn’t obviate the purchase need. Revenue increased a modest 1% in the most recent quarter, and earnings per share increased 3%, short of its usual double-digit expansion rate. Investors are also concerned that customers will increasingly buy their auto parts from, though that hasn’t been the case yet despite auto parts having been sold online for a while now. We think Amazon will have some impact on staples like windshield wipers and motor oil, but most of AutoZone’s sales are to customers who need parts immediately, like mechanics, or rely on AutoZone’s staff to identify the right part, help with installation, or lend them obscure, specialized tools specific to certain cars. The stock is priced so low, at about ten times earnings, which we believe is a thick margin of safety that factors in a lot of risk.

Doctor group MEDNAX had a rough quarter due to a combination of fewer births in its neonatal group and its costs creeping up faster than its revenue. While MEDNAX still has a nice growth trajectory and cash flow yield, we’ve become less sanguine about its economic model given tougher pricing from major insurers and potential cuts to Medicaid. We sold off some of our position during the quarter. MEDNAX brought down performance by 0.9% in the quarter.

On the positive side, Google parent company Alphabet added 0.7% to performance. Despite its size and dominance in search, Alphabet is still growing its earnings at a rate above 20% and looks set to do so for a while. Despite this growth trajectory—and run up in the stock price—the stock remains quite reasonably priced.

After a couple of rough years, American Express’s core business has stabilized and is starting to grow again. Its stock’s rebound added 0.4% to the fund. Competitor Mastercard’s stock gained during the quarter and also added 0.4%.


Security% of Net Assets
Alphabet, Inc.8.8%
Union Pacific Corp.6.5%
Bank of America Corp.6.4%
Wells Fargo & Company6.2%
JPMorgan Chase & Co.5.5%
American Express Co.5.4%
Mastercard, Inc.5.1%
Carter's, Inc.4.8%
Berkshire Hathaway Inc.4.6%
Ross Stores, Inc.4.3%
PPG Industries, Inc.4.3%
Visa Inc.4.2%
AutoZone, Inc.4.2%
Continental Building Products, Inc.3.8%
HD Supply Holdings, Inc.3.6%
Discovery Communications, Inc.3.4%
MEDNAX, Inc.2.3%
Armanino Foods of Distinction, Inc.2.1%
Verisk Analytics, Inc.1.4%

*Cash represents cash and cash equivalents less liabilities in excess of other assets.

The fund did not add or eliminate any investments during the quarter.

Investing Climate

The current interest rate on the benchmark 10-year US Treasury bonds is about 2.3%, decently higher than the all-time record low of 1.37% we saw just a year ago, but still nowhere near the pre–financial crisis range of 4–5%, and laughingly far from the 6–7% range of the early 2000s. Getting a 6–7% risk-free return seems a world away. A question for investors is whether long-term rates are going to remain at this lower plateau for the foreseeable future. We think rates will creep up as the Federal Reserve continues nudging up short-term rates, but it’s hard for us to see an environment soon where high- single-digit rates are the norm again. A combination of semi-permanent global monetary stimulus and ever-growing pools of money chasing slower economic growth have made pickings slim, and those factors don’t appear to be changing in the near future.

As returns from bonds remain dampened, there’s a spillover effect on stocks as investors seek out returns elsewhere, and as we’ve written about a number of times, prospective returns from stocks look to us to be lower than they have been the past eight years. Given our focus on wealth preservation and long-term compounding, the fund remains conservatively positioned as we seek out attractive, risk-adjusted returns in a pricey environment.

As always, thank you for investing.

Stephen Dodson            Raphael de Balmann
Portfolio Manager         Portfolio Manager